What does a lender's credit memo cover on a 7(a) loan?

The credit memo must show the business can repay from cash flow. SOP 50 10 8.1, Sec. B, Ch. 1, Para. C.2.a (about pp. 118-121) sets its contents for a Standard 7(a) loan.

The business

• Its nature and history.
• Length of time under current management.
• Management experience in the industry or a related one.
• Who runs daily operations, and any management agreement.

Repayment

• The three most recent years of financials, plus an interim statement.
• earnings before interest, taxes, depreciation and amortization (EBITDA) and justified adjustments, such as owner's draw and S-Corp tax distributions.
• Debt service coverage of at least 1.15:1.
• Working capital adequacy, at a minimum over the next 12 months.
• The effect of any affiliates.

Owners

• Personal credit reports for owners and guarantors, with any issues discussed.
• Liens, judgments, bankruptcy filings and pending litigation, including divorce.

Structure

• Collateral adequacy under Appendix 19.
• Life, hazard and liability insurance.
• Equity position and any required injection.
• A pro forma balance sheet and ratios such as Debt/Tangible Net Worth.
• Support for refinancing any debt.

The recommendation

The lender must state why credit is not available elsewhere on reasonable terms. It must also discuss seller financing, standby agreements and 90+ day delinquencies.

On 7(a) Small and SBA Express loans, lenders may use their own forms and internal credit memos (Sec. B, Ch. 2, Para. C). The depth of analysis varies by lender.